Engagers and PSCs in the public sector take note: ‘Off-payroll working in the public sector: reform of the intermediaries legislation’ – consultation released.
In my colleague’s blog, ‘IR35, PSCs and the Public Sector’, he discussed the proposed changes to the intermediaries legislation and, as promised, now that further information has been released, I just wanted to clarify these changes.
On 26 May 2016, HMRC released its consultation document, discussing its plans to reform IR35 (the intermediaries legislation) for off-payroll engagements of workers who operate through an intermediary in the public sector. This reform is taking place because ‘there is evidence of widespread non-compliance with the existing legislation’ – claimed by David Gauke MP, Financial Secretary to the Treasury.
After reviewing the consultation document, the first thing I would like to make clear is that there are no hidden surprises. It appears that the original proposal is here to stay and certain to go ahead; the consultation has been released more as a way to seek views on the proposal and the implementation process, rather than call for alternative solutions.
The consultation does however provide further clarification on the ‘digital test’ that will be used to decide the fate of off-payroll workers and information on the tax requirements, should workers fall under these new rules.Before I get into the details, just to clarify, HMRC’s solution for non-compliance in the public sector is as follows…
From April 2017, engagers (the public sector body, agency or third party) will be responsible for applying the intermediary rules to workers who they engage through a limited company, usually a Personal Service Company (PSC). This means that the engager will be responsible for ensuring the correct amount of tax is paid by the worker and will be liable for any income tax and national insurance. The whole of the public sector will be affected, most noticeably the NHS.
If there are a number of engagers/agencies in the contractual chain of a worker, it will always be the engager that contracts directly with the off-payroll worker/PSC who will be liable.
When HMRC first proposed these changes, many were concerned that engagers would simply err on the side of caution and make all of the workers they engage through a PSC subject to the new rules, affecting those who are honestly self-employed.
Supposedly, to alleviate this concern and to make the lives of engagers easier, HMRC will introduce an ‘interactive online tool’, allowing engagers to see definitively whether a worker is subject to these new rules or not.
In the first instance, there will be a quick test to remove completely those business to business relationships that fall outside of the scope of the rules.
If the off-payroll worker is not ruled out by the first test, the engager will then have access to further tests. It is interesting that HMRC has already stated that it will be bound by the outcome of the test (providing correct information has been provided initially), although we will have to wait and see whether HMRC stick by this.
The tax treatment of PSCs in the Public Sector
If off-payroll workers fall under IR35, they will evidently be subject to tax and National Insurance. However, where this consultation becomes a little sketchy is in regards to the 5% allowance, which is available to intermediaries to cover the general expenses of running a business. As far as I can tell, HMRC seem to be deliberating over whether this one remaining benefit available to PSCs in the public sector, should be removed. Under the new rules, the government claim that retaining the allowance will make the process of accounting for tax more complicated. Therefore, alternative options are being explored.
Under the new rules, off-payroll workers that are employed through PSCs in the public sector will still be responsible for VAT. Therefore, where the rules apply, the engager will make the tax and National Insurance calculation based on the contract price less VAT.
Whether or not your off-payroll workers are subject to these new rules, it is without doubt that public body recruitment agencies and public sector employers will face increased administration burdens. HMRC has grandly stated that it is exploring the impact of the changes on engagers and will try and mitigate as far as possible any adverse costs and impacts. The key point to note here is that HMRC will mitigate ‘as far as possible’; I am unsure what, if anything, HMRC can actually do to decrease the administration burden of these changes (other than scrapping the whole rule change altogether).
The burden for engagers is huge, they need to ensure that tax is not paid twice, VAT and Corporation Tax are accounted for and the 5% allowance correctly deducted. In order to ensure this is done correctly and you are not liable for incorrect payments, I advise you review your payroll process now.
It is expected that the proposals outlined will solve non-compliance in the sector; although, I fear that it will just mark the end of PSCs in the public sector. Instead, I expect many workers employed through a PSC to consider becoming employed directly or to move to the private sector.
The consultation is open until 18 August 2016 and the legislation will apply from April 2017. If you would like to express your views on the consultation, you can send your written response by 18 August 2016, via email to: firstname.lastname@example.org.
HMRC will also be holding round table discussions with interested parties. Please email email@example.com if you would like to be involved.